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TO THE ROBOTS?
Making decisions in a world of big data; managing in a
world driven by algorithms
Michael Ross
PABLO PICASSO
ALGORITHM-AS-EMPLOYEE
Many businesses are getting excited at the possibilities of big data. But data is only useful if it changes the
way you make decisions. Big data may sound exciting, but it is utterly useless if you continue to make
the same decisions, in the same way, with the same data and at the same frequency. Not only will you
have missed the point, you will also have missed the opportunity.
To respond and thrive in this new reality, businesses have to completely rethink how they make decisions, and
then how they execute and manage them.
Algorithms are the answer: the logic of how you make thousands, and even millions, of automated
or semi-automated decisions in the digital commerce world. These algorithms are already amongst us.
Core retail activities such as google paid search, product feeds, product recommendations, on-site search,
retargeting and triggered emails are already powered by algorithms. But just because you have an algorithm,
doesnt mean it is any good.
Algorithms need to be thought of like employees - they need to be managed. They need to be trained,
set the right objectives, reviewed and given feedback. If they consistently underperform, they need to be
replaced.
While humans can be resistant to feedback and may obfuscate or explain away mistakes, algorithms thrive on
feedback and failure. In fact, the essence of machine learning is based on understanding failures and missed
opportunities, and evolving parameters and models accordingly. In the human-computer era, one needs to
establish the right culture, processes and governance that will allow algorithms to develop and thrive.
The management and optimisation of algorithms is a new muscle for retailers. This paper gives practical
guidance on how to rethink business decisions in the digitally-enabled, data-driven, algorithm-powered world.
It covers:
1.
2.
3.
4.
Consumer behaviour is changing radically. Consumers now have almost unlimited choice, and are
empowered and informed. They are using a portfolio of devices, being bombarded by digital marketing
and are shopping in new and complex ways. The result? Consumers create data, providing managers
with a tsunami of available data to use
Businesses have a vast new set of decisions to make. Firstly decisions on how to become digitally
enabled, and thereafter to take advantage of the ability to personalise and optimise all interactions with
customers and products. The result? Decisions consume data, while at the same time creating more
and more data
CONSUMER BEHAVIOUR
Devices
eCommerce
Beacons
Marketing
Empowered
Informed
Unlimted Choice
DATA
DECISIONS
Digital enablers
New frequency/logic
Atomised
The consequence is that the logic and economics of many core retail decisions relating to marketing and
merchandising have changed. This is predominantly caused by the transition of marketing from a fixed
to a variable cost (per impression, per click, per transaction). Trivial as this sounds, it has changed the
fundamental equations of retail (do I spend the next on price or marketing?). In addition, it has elided the
marketing-merchandising-store organisational boundaries - silos which made sense in the past, however
dont anymore.
At the heart of the change is the atomisation of both the decisions and the data. We are now faced
with millions of decisions and hundreds of millions of data points.
The key is to start with the decision and then ask how the data (whether big, small or medium) allows you to
make decisions more intelligently, more frequently or more profitably.
DECISION HIERARCHY
Level 1
Strategic
Level 2
Planning
Level 3
Tactical
Level 4
Programmatic
Level 1. Strategic decisions (annual). Typically familiar decisions that businesses have been making for
years. For example: which new markets to enter, where to locate new shops and what new categories to
develop?
What has changed? - New data is now available to inform the decisions, such as:
-- New retail locations can be informed by looking at the postcode of loyal online shoppers
-- New categories can be informed by searches made on the site by VIP customers for categories that
do not exist
Level 2. Planning decisions (bi-annual/seasonal). Again, these are familiar decisions such as: range
planning (breadth and depth), which brands and products to continue or delist, marketing budgets;
channel allocation and technology roadmap
What has changed? The decision logic is different, requiring new data and logic:
-- Size ratio planning can be informed by looking at the size distribution of customers viewing products
and the impact on sell-through
-- Products can be evaluated in terms of their impact on acquiring and retaining high value customers
-- Sales can be planned based on expected sales from existing customers, and consequently how
many new customers need to be acquired
Level 3. Tactical decisions (weekly/daily). Many of these decisions sound familiar, but are actually very
different in the digital world. For example: pricing, promotions, digital marketing, site sort orders, landing
pages and digital touch points
What has changed? The decision logic is different (new trade-offs are required), the level of action is
typically more granular and the frequency of decisions needs to be optimised
-- Retailers need to decide (and can now make the trade-off) whether to invest the next in price,
marketing or a customer promotion
-- CRM actions can be informed by whether the customer is actively browsing the website
-- Sort orders can be personalised and changed every week, day or hour. A key question is what is the
optimal frequency?
Level 4. Programmatic decisions (hourly/real-time). For example: programmatic marketing,
personalised search results, keyword bids and product recommendations
What has changed? The decisions are being made at a very low level of resolution, are increasingly in
real-time (so they need to be automated), are often new and continually evolving
-- Retailers can suggest unique product recommendations for each customer viewing each product
-- Retailers can retarget individual customers who have taken a specific action on their site
-- Landing pages can be personalised based on the customer and the intent of their visit
-- Site search engines can increasingly personalise the sort order (product ranking) of search results
DECISION CHECKLIST
DATA
CONTROL
DECISIONS
ALGORITHM
ACTION
FEEDBACK/
METRICS
OBJECTIVE
MODEL +
PARAMETERS
Description
Discrete choices
Threshold
Value
Binary choice
Examples
As well as understanding the objective and controls of each decision, it is important to work out the
interaction between them:
What frequency of control is possible? If wrong, how quickly can the decision be changed?
Whats the feedback time? How quickly will we know if the decision is good or bad?
Whats the cost of a wrong decision?
Whats the sensitivity of the outcome to a bad decision?
This is critical to set the context for making the decision. It is easy to change your mind on decisions that are
low cost and rapid feedback, but more expensive to reverse decisions which are high cost and where feedback
is slow.
The essence of algorithms is that they operate at a low level of resolution, so one algorithm might make
thousands, if not millions, of programmatic decisions. Algorithms are everywhere. Whether retailers like it
or not, more and more of the critical decisions within their digital commerce business are increasingly being
made by algorithms.
Control
Level of execution
Threshold
When to trigger a
promotion to a lapsing
customer
Discrete
choices
Value
Algorithm example
Need a governance
process to review the
algorithm
Need someone to
manage the execution
DATA
Data is often described as the new oil, needing to be mined, extracted and refined. Unfortunately, it is
often an afterthought because the consequences of bad data are not immediately visible. But bad data is
cancerous quietly undermining the quality of decisions.
In reality many retailers are suffering from significant data debt, where years of poor (or non-existent)
data management are now coming home to roost. To introduce good data into your business, we suggest
focusing on the three core building blocks:
Collecting data: Businesses need to recognise the criticality of instrumentation to ensure that data
is collected and is of high quality. A common excuse from retailers is our analytics tagging is not very
good, but when web analytics is the critical glue that joins data in the digital world this excuse should no
longer be tolerated
Joining data: While the data all originates in silos, it has to be joined to have any hope of making profitcentric decisions. The key to joining data is ensuring common fields between systems
Storing data: Data storage has historically been seen as a cost to be optimised, and so data has
been aggregated or thrown away. But storing data is now almost free - Amazon Web Services has
commoditised storage (for example standard storage is now 3 cents per month for 1 GB)
Humans
Computers
Automation cycle
ACTIONS
Workow
Tagging
Intrumentation cycle
CUSTOMER
BEHAVIOUR
Alogorithms
Logic
Optimisation cycle
DATA
Digital exhaust
Transactions
DECISIONS
Metrics
Inference
MANAGEMENT
Organisation
Incentives
PEOPLE
It is ironic that in a world of big data and automation, many of the toughest management challenges are
people-related. While many aspects of retail decisions can be automated, people are still needed at the
heart of the business it is people who turn the data into something useful.
Retailers need to employ many different types of people to make sense of their data, and it is critical to think
of data as a team effort. Some of the roles we are now seeing in successful data-centric businesses include:
Decision architects: people who understand the business problem you are trying to solve, and can work
out what questions to ask. This is the creative end of data science and these are typically people with a
strategy consulting background
Algorithm developers: people who understand the logic/math to translate the business problem into a
solvable math problem. The key here is to refine the question into something that is answerable given the
available data. These people are typically mathematicians, statisticians and engineers
Data analysts: people who are able to make it work once. These are people with advanced Excel, basic
database and web analytics skills, who are good at cleaning, joining and manipulating data
Data product managers: people who understand the technical requirements to translate the one-off
solution into a technical roadmap. These are people with technical product management experience and
they are the bridge between the business and developers
Big data developers: people who can actually build and operationalise a technical solution. These are
people with skills in database architecture and software development
Action-focus
Decision
science/project
management
Automation/
articial
intelligence
Insight-focus
Business problem
Exploratory
data mining
Reporting/
business
intelligence
One-o
Operational
Business process